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Tuesday, August 03, 2010

Compañía Mexicana de Aviación (CMA), AKA Mexicana Airlines, filed an insolvency petition today with a Mexico City district court. Mexicana also filed a Chapter 15 bankruptcy petition in New York. The airline intends to continue operating while it reorganizes. Domestic subsidiaries Click and Link are not a part of the bankruptcy filing.

According to a press release issued today by Mexicana, the filings were made "in order to obtain bankruptcy protection and injunction relief in both countries." The 'Concurso Mercantil' filed with the Mexican courts is similar to Chapter 11 bankruptcy in the U.S. in that it guarantees the operation of the company while it restructures.

Mexicana said yesterday that "the company's financial and labor situation is no longer sustainable," and the airline proposed drastic cuts to crew pay: 41% for pilots and 39% for flight attendants. Mexicana also proposed to lay off about 40% of its present crew work force. Quoting from the Aug. 2, 2010 press release:

...Concerted efforts have been made over the last four and a half years to restructure costs, efforts that have translated into savings of some US$800 million as a direct result of investment in IT systems, new routes and more efficient aircraft, but have not been sufficient to offset its crew costs.

Although the airline’s operating costs excluding crew labor costs are 30% lower than the average of legacy airlines in the United States, these non competitive labor costs are the main reason why the company has continued to suffer losses, to the extent that it is now financially non-viable. According to company sources, CMA’s pilots earn 49% more than the average wage paid by legacy airlines in the United States and 185% more than the average pilots flying Airbus A320s for other Mexican low cost airlines like Volaris or Interjet. Likewise, Mexicana Airlines flight attendants earn 32% more than the U.S. average and 165% more than their Mexican counterparts employed by the same airlines.

Numbers confirm, that if the CMA’s collective contracts had been more competitive, instead of registering losses of US$350 million from 2007 to date, the company would have posted profits of US$350 million, illustrating that CMA does indeed have the potential to be a profitable, financially viable carrier.

However, in light of the current situation, CMA has presented its pilots’ and flight attendants’ unions with two alternatives.

The first is the option to enter into a new collective contract to secure the CMA’s long-term financial viability. This would imply accepting cuts of 41% and 39% in wages and fringe benefits for pilots and flight attendants, respectively. This alternative also calls for additional cost-cutting measures, including downsizing 40% of the airline’s pilots and flight attendants. On the upside, it incorporates a profit-sharing plan whereby the unions would get a percentage of any operating profits that exceed 5% of the company’s total revenues.

As a second alternative, stockholders have offered to sell CMA to its unions for the token sum of $1 peso, proving them convinced of the vital role these labor organizations will play in the future of the company. As the only entities capable of turning the situation around, CMA’s management have stated that it would be willing to transfer control of the airline to its unions. The transaction would require further and more detailed negotiations with the unions, but in broad terms would require NGA to assume liabilities of US$120 million in bank credit lines, while the unions would have the option of retaining a BANCOMEXT loan for US$80 million or transferring this credit line and its respective sureties to NGA. The unions would also be given a six-month permit for the use of the Mexicana Airlines brand name, among other measures designed to allow for a smooth transition.

In response to statements by representatives of the pilots union (ASPA) to the effect that both proposals outlined by CMA would be rejected, the company said that it is time to acknowledge reality, that the paradigm of commercial aviation has changed worldwide and that only airlines that operate at competitive costs can hope to survive and continue flying. CMA will continue to negotiate with its unions.

A short time ago, Reuters published an article about the Mexicana situation, reporting that crews "already gave up multiple benefits in 2006, saving Mexicana around $35 million per year," and thus are reluctant to accept the pay cuts proposed this week. The Reuters article included comments attributed to crew union leaders:

"We don't have any other option than continue negotiating," Fernando Perfecto, head of the pilots' union told Reuters on Tuesday after learning Mexicana had filed for creditor protection.

"We are not going to stop working, on the contrary, we will continue business as usual," he said, knocking down any possibility of a strike.

Lizette Clavel, who heads the flight attendants union, told Reuters on Tuesday the creditor protection filings came as a surprise to unionized employees.

Commenting on the option presented to crews to buy out Mexicana, Ms. Clavel said, "We reject the fraudulent intention of making Mexicana de Aviación file for creditor protection since this means sharing the losses while privatizing the gains by leaving Click and Link out of the proceedings."